The idea of hiring a robot to manage your investments might sound like something out of science fiction. Less than a decade ago, it was. But not anymore.
Originally used to assist certified financial advisors, robo advisors now take on a primary advisory role for millions of investors around the world.
MyPrivateBanking Research estimates that global assets under management (AuM) of robo advisor services will reach $20 billion USD by the end of 2015. They say the lion’s share (about 79%), will be managed by US-based robo advisors. By 2020, the global AuM of robo advisors will be an estimated $450 billion.
Robo Investing: Here’s How It Works
Robo advisors offer automated wealth management services, and take a data-based approach to re-balancing and guiding an investor’s portfolio.
Once you’ve outlined your investing preferences, a robo advisor creates a personalized investing strategy for you.
If you prefer face-to-face counsel, this kind of automated online investment service may not be to your liking. On the other hand, if you’re tired of high fees, lengthy phone calls and the subjective opinion of a traditional financial advisor, a robo advisor might be a refreshing change.
With that said, not every robo advisor has the same capabilities, so do your research. Some services are perfect for those close to retirement, while others are clearly focused on young professionals or beginning investors.
For instance, some robo advisors can calculate the required minimum distribution (RMD) from your IRA or 401(k). You can be penalized with heavy fees if you don’t take your RMD; having a robo advisor serve as a reminder could save you thousands.
Also, before you open an account, compare the services that interest you and find one that best fits your needs. Some robo advisors only sell exchange traded funds (ETFs) while others, such as FutureAdvisor and Vanguard, are designed to manage existing portfolios.
If you find a robo advisor that can’t work with your current retirement accounts, keep walking (or rather, keeping searching). You don’t want to cash out your assets just so you can set up a new account.
And if personal interaction is important to you, find a robo advisor that comes with a real person you can call.
